Recently, while analysing some of the diagnostic companies, we came
across Thyrocare. We have some problems with Thyrocare, it seems things are
not making sense or else we are missing something. (Actually we were
missing something- This helps to see how the picture unfolded or how things became clearer for us)
Some facts, all three players (Dr Lal, Metropolis and Thyrocare) follow a
hub and spoke model for collection of samples and its mainly done through
franchise agreements.
1. EBITDA Margins and Business Model:
If we look at margins of all three players:
Since Dr Lal path Takes revenue booked directly from us and then pays the collection partners. Approx 10-12% of revenue is paid to collection partners which is included in other cost. However, other two players take net revenue.
Now if we take the revenue of Dr lal Path excluding paid to franchisee partners its profile looks exactly similar to Metropolis. Thyrocare looks extremely different having 40% margins, though its scale is half it must be doing something different. But to our shock that is not the case. Its employee cost is half of the others % age wise, either it is very reputed to hire employees cheaply or simply its charges its customers on a high note.
Lets first understand the business model
Thyrocare claims to generate 70% of its revenues from institutional clients, while the ratio is 60-70% for Metropolis, Dr Lal claims to say it generates around 40% from B2B business. (Source concalls and investor presentation) Now our common sense tells us in B2B business there has to be high amount of price competition and may be thyrocare is doing something unique. Thyrocare claims its doing mainly B2B business. Perfect then its margins must be less and turns must be more, however that’s not the case.
Lets listen to comments of B2b Business from Dr Lal:
He clearly mentions margins profile are fairly similar. They all are almost competing in the same B2b Markets aggressively.
Now lets check it from metropolis:
Now if even the EBITDA margin is 7-8% higher in B2B, we know metropolis is generating around 60% of its business from there and even if its margin from B2b is 35-36%, the margin in B2C has to be very low to make Metropolis real margin of 28%.
But Thyrocare is generating 40% margins, where is this coming from? (Taken standalone numbers in Thyrocare to see its diagnostic business)
2. Asset Turns
If the business model is B2B then definitely, higher margins either Thyrocare is charging more to its clients. In fact it is the opposite.
Fixed asset wise the turns are almost similar to that of Dr Lal and Metropolis. In fact it is doing the cheapest testing it seems but margins are still high.
Lets think from working capital perspective,
A) Creditors– While Dr Lal and Metropolis get 1 month credit approx, Thyrocare makes the fastest payment – This could be a business strategy, but it also gets the Raw Materials may be a bit expensive, but this is not useful.
B) Debtors– DSO, for Dr Lal is less than 15 days dealing mainly with B2C, while Thyrocare is also less than 15 days dealing more in B2B. Metropolis which is similar takes 1 month DSO. Its management explains (In B2b generally DSO should be more)
One thing is clear, Clearly the cost of operation of Thyrocare is the cheapest, but how?
3. Employee Cost
Clearly, it is the employee cost which is roughly half (in % terms) vs other players making the difference. (10% vs approx 20% of others)
A) Cost per employee
Thyrocare – Rs 26-30 K per month
Metropolis – Rs 36-40K
Dr Lal – Rs 46K
B) Employee strength is even 1/4 that of other two players. Majority of employees needed are for collection or other things. Either Thyrocare is having some different way of collection and franchising.
Is it having a different agreement or not charging some cost on its own. However, this does not seem to the case:
This is from their prospectus it is quite similar to Dr Lal and Metropolis. So their cost of employees and delivery ought to be similar.
C) Thyrocare Employee Reputation is like Tata, People are willing to work for half what others get. However, Glassdoor does not seem to suggest the same:
This is out of 168 reviews.
D) Lets see what the Thyrocare management seems to suggest?
Still not a concrete Answer.
We still have no idea, how it is operating at half the cost and charging the cheapest price, its only possible you can either have high turns or high margins or only in cases of temporary shortages. If the numbers make sense, There is no competitive element which seems to be effecting Thyrocare – It is in competition less world without having any kinds of moat (Technological or any other barrier)
Other Expense: Management is spending around 22 crore on advertisement, which is more than Metropolis, given its half the size. Though we do not think it is something to be thought of much.But another point which we think is the Postage and Courier charges (Cost of bringing samples) is less than 1% for Thyrocare while Metropolis and Dr Lal the same is around 3.5%.
Even these 2 points can be ignored, but still we do not have any idea about how 40% margins and so cheap employment cost?
4. What Were We Missing?
Finding no evidence in balance sheet signifying any kind of fuging up (Else in
fudged up cases there is generally up something in balance sheet – Vakranjee,
Ashapuria, Manpasand Beverages), We ruled out fuging.
After going lot of backward and forward, we finally found the answer for
such huge differences.
HUB and SPOKE Model of THYROCARE AND OTHERS ARE DIFFERENT
There are three layers to hub and spoke model:
1) Central Labs
2) Regional Labs
3) Patient Service Centres
In terms of Regional Labs for similar revenues:
Dr Lal Path 100 labs
Metropols 80 Labs
Thyrocare 7-10 Labs
Then our next question if its true then the asset turns (Sales/Fixed Assets) ought to be higher for Thyrocare?
We compared when the revenue was similar for all three. Turnovers of all three players were similar, But as we know from our per sample prices, Thyrocare is getting the cheapest hence Turnover could be similar.
So Thyrocare probably, is having larger and fewer labs and generating business mainly from B2B. Because almost the Fixed Asset cost is same for all three for similar revenues.
Now if we invert? If this increases efficiency, why is Dr Lal or Metropolis not doing so. May be what Thyrocare is doing is good for bulk samples but B2C, we think it will lead to higher turnaround times and transportation cost. Too much concentration raises the risk in terms of fast delivery and high transportation cost. (Some people may differ) (Risk wise its not that sensible it seems)
We think B2C, if Thyrocare is delivering the samples in a day faster than Dr Lal, Metropolis you ought to question the reliability of test? Or its cost may spike up. You may differ its fine.
All three have trade-off between a larger Satellite Labs and transport times. Similar on ground feedback was what we got.
Some more questions beyond that to think? What about valuations? Management? Future growth? Future Risk Competition?
5. Your Opinion Please?
This was about how we can use a business model to decode strategy.
However, we would like your opinion about which hub and spoke model is better and why? Thyrocare or Dr Lal Path Labs?
We believe it is Dr Lal Path Labs? However, you may differ? Please tell us your perspective too.
This is no way an investment advice or comment on promoters. It is the promoters who are doing the real work on ground, we just want to use it as a case study. For investment advice please consult your investment advisor, as this article is only about business strategy, while investment requires answering many other questions?
Argha Investment Advisers 